November 12, 2013

Second Circuit Holds In-House Lawyer Precluded from Blowing Whistle on Former Employer

Holland & Knight Alert
Christopher A. Myers

The Second Circuit issued an opinion tackling the interplay between an attorney's ethical obligation to maintain client confidences and the ability to act as a "whistleblower" to report unlawful conduct to the government. The court's opinion was issued on Oct. 25, 2013, and the case is Fair Laboratory Practices Assocs. v. Quest Diagnostics, et al., 2013 WL 5763181, No. 11-1565-cv (2d Cir. Oct. 25, 2013).

Plaintiffs Alleged Defendants' Pricing Scheme Violated the Anti-Kickback Statute

In 2005, plaintiff Fair Laboratory Practices Associates (FLPA) filed a qui tam action pursuant to the False Claims Act against defendants Quest Diagnostics Incorporated and Unilab Corporation alleging violations of the Anti-Kickback Statute. FLPA was formed for the sole purpose of bringing this qui tam lawsuit against Quest and Unilab. One of the general partners in FLPA, Mark Bibi, previously served as general counsel to Unilab, with the two other partners being former Unilab executives as well. In his role as general counsel, Bibi served as the sole lawyer for Unilab, advising the company on its contracts with managed care organizations (MCOs), managing the company's litigation, and advising the company on compliance with healthcare fraud and abuse laws.

Quest provides diagnostic medical testing services for MCOs and independent practice associations (IPAs). Quest acquired Unilab, a clinical laboratory company, in 2003. The plaintiffs alleged in their federal lawsuit that the defendants violated the Anti-Kickback Statute by operating a "pull through" scheme, whereby defendants charged IPAs and MCOs below cost rates for laboratory tests to improperly induce physicians in the IPAs to refer Medicare and Medicaid-reimbursable patients to the defendants and to induce the MCOs to arrange for their in-network physicians to send Medicare and Medicaid-reimbursable tests to the defendants. The plaintiffs alleged that such a scheme violated the Anti-Kickback Statute, which prohibits offering "remuneration" to induce another person to make referrals for services for which payments may be made under a federal healthcare program. 42 U.S.C. §1320a-7b(b)(2). The statute defines "remuneration" as including "transfers of items or services for free or for other than fair market value." 42 U.S.C. §1320a-7a(i)(6).

Court Found the False Claims Act Does Not Trump Attorney's Duty of Confidentiality

While the federal government clearly has a significant interest in encouraging people to come forward to report fraud and abuse without fear of retaliation, the Second Circuit held that such an interest does not trump the government's strong intent to preserve the attorney-client privilege. Both the Second Circuit and the Southern District judge discussed striking a balance between those interests, which were squarely at odds in this case. In conducting that analysis, both courts rejected the plaintiffs' arguments that the False Claims Act pre-empted the rules of New York state that govern the disclosure of client confidences. Writing for the Second Circuit, Judge Cabranes said, "Nothing in the False Claims Act evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney's disclosure of client confidences." Fair Laboratory Practices Assocs., 2013 WL 5763181 at *5.

The proper inquiry then was whether Bibi violated New York's ethics rules by disclosing confidential information about Unilab for use in the lawsuit and whether such a violation warranted dismissal of the underlying complaint and disqualification of the individual relators and their counsel. The court held that New York ethics rules preclude an attorney from disclosing confidential information of a former client, with limited exceptions. N.Y. Rule 1.9(c). One such exception permits disclosure should the lawyer reasonably believe disclosure is necessary to prevent the client from committing a crime. N.Y. Rule 1.6(b)(2). While Bibi may have reasonably believed the defendants were committing crimes by violating the Anti-Kickback Statute, the Second Circuit held that the confidential information revealed by Bibi exceeded what was reasonably necessary to prevent the alleged fraudulent scheme. The Second Circuit acknowledged that the other partners in FLPA possessed sufficient information to bring the action, but Bibi made the conscious decision to participate in the action and to divulge protected client confidences.

Not only did the Second Circuit uphold the district court's finding that Bibi violated the ethics rules, the court also upheld the decision to dismiss the complaint and to disqualify the plaintiffs, and their counsel, from pursuing the action. Because Bibi engaged in "unrestricted sharing of confidential information with the other relators," the Second Circuit held that there was no way to avoid prejudice to the defendants. Fair Laboratory Practices Assocs., 2013 WL 5763181 at *9. The disqualification of FLSA's counsel was similarly found to be within the province of the trial court's discretion.

Implications for Companies in Regulated Industries

This case presented the Second Circuit with a question that has the potential to keep corporate executives up at night: can an in-house attorney use confidential communications to blow the whistle on a former client? To the reassurance of many, the Second Circuit answered in the negative. The opposite result could have struck fear in the hearts of executives in highly regulated industries, such as healthcare, who routinely turn to their in-house colleagues and outside attorneys for advice on the fraud and abuse laws. Since the False Claims Act can bring significant financial payouts to relators, allowing attorneys to divulge client confidences to obtain such payouts would expose them to an inherent conflict of interest. Despite the incentives to whistleblowers in federal statutes, such as the False Claims Act and Dodd-Frank Act, the Second Circuit upheld an ethical check on an attorney's ability to participate as a relator against a former client. It seems that this same principle would apply even more strongly to lawyers and their current clients.

In recent years, Congress has expanded the scope of the False Claims Act and other whistleblower "bounty" provisions as part of healthcare and financial reform. Congress enacted amendments to make it easier for both whistleblowers and the government to pursue actions under both the False Claims Act and the Anti-Kickback Statute. Notably, the Southern District found that the plaintiffs' disqualification did not foreclose the government, the real party in interest in False Claims Act cases, from intervening — a finding not disturbed on appeal. While the federal government opted not to intervene in this particular case, the federal government's declination in these cases is hardly a sure thing. As a result, companies operating in highly regulated industries should ensure they have in place effective compliance programs. While not a complete defense, strong compliance programs give companies potentially powerful arguments against corporate liability. 

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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